June 2021 • Topic: Capital markets • by Panagiotis Asimakopoulos
Our unique index measures the relative scale of banking and finance in more than 60 markets across more than 40 metrics of domestic and international activity. It also shows how different financial centres have grown over the past few years – and sets a benchmark to measure future growth and shifts in activity.
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The UK is by far the largest financial centre in Europe and has a much bigger lead over its European rivals in international banking and finance than other rankings suggest, according to the latest report from New Financial. However, financial centres in Asia are catching up fast – while the EU is shrinking in relative terms – and the UK’s lead in some sectors will already have been dented by Brexit.
Brexit and the potential impact on the City of London has triggered a debate around the relative strengths and weaknesses of different financial centres around the world. With Brexit now a reality and the debate around financial centres gaining more traction among governments, policymakers and regulators, we thought it was important to revisit this topic by updating and improving our research. The New Financial Global Financial Centres Index is an attempt to inform the debate by ranking financial centres primarily in quantitative terms based on the scale and value of financial activity.
A new perspective
Most existing studies on financial centres measure the attractiveness and competitiveness of different markets using qualitative factors – in some cases 90% of the metrics used to produce the rankings are not based on the value of activity.
We think the best way to measure attractiveness and competitiveness is to measure the value of activity and business that firms choose to conduct in different markets. In this report we focus mainly on measures of size and volume of financial activity to rank financial centres around the world.
This approach captures the differences in scale between financial centres and identifies the relative position of each financial centre. We also make a clear distinction between domestic and international financial activity which allows to provide separate rankings for the size of domestic and international activity and identify whether a financial centre is more attractive for international business than others.
Another key distinction to other studies is that our analysis is conducted at a country level rather than the city level, mainly for two reasons. First, it would be difficult – if not impossible – to allocate activity or the size of sectors to different cities within a country. Second, in most countries the majority of financial activity takes place in one city. For example, while Edinburgh, Manchester and Belfast are all thriving financial centres, the vast majority of activity is conducted in London.
In addition to our main index and rankings for domestic and international activity, this report includes an analysis of the change in financial activity since 2016 which enables us to see how financial centres have evolved over time and identify trends and changes in the rankings. We have also grouped the different metrics of financial activity into sectors which helps us identify the strengths and weaknesses of each financial centre.
Finally, we have also included a ranking based on the wider environment and ecosystem around the financial sector in each country and a ranking combining financial activity and wider environment metrics, which provide a broader picture and an insight into other factors contributing to the size and depth of financial centres, as well as an analysis that looks at the share of activity conducted by foreign actors in a country out of the total activity taking place in the country.
Here is a short summary of this report:
1.The dominant global financial centre: the US is the world’s top financial centre by a wide margin: its overall score of 84 out of 100 is more than double that of the UK (35), and it is by the far the largest finance centre in absolute terms for both domestic activity (17 out of 21 sectors) and international activity (11 out of 21).
2. The dominant European financial centre: the UK is by far the dominant European financial centre. Its overall score of 35 is nearly three times that of France, Germany or Luxembourg. The large gap between the US and the UK and the wider gap between the UK and the rest of Europe in our rankings compared with other studies is mainly because of the focus on quantitative metrics of financial activity rather than qualitative metrics.
3. Rising stars: China is the third largest financial centre in the world, ahead of Japan, Hong Kong and Singapore. This is mainly because China has a big domestic financial sector, which compensates for its relatively weak performance as an international financial centre. Asian countries account for four of the top 10 financial centres and for eight of the top 20 in the world, and have grown most rapidly since 2016.
4. Brexit and the City: our rankings highlight the dominance of the UK as a financial centre in Europe. In terms of the overall size of domestic and international financial activity, the UK is nearly three times larger than France, Germany or Luxembourg. For international activity, which is most at risk from Brexit, the UK is in a league of its own: its score of 56 is more than double that of Luxembourg and roughly five times higher than Germany and France. It is too early to capture the impact of Brexit on international financial activity but the UK’s lead in key sectors such as foreign equity trading and foreign bank assets will already have been dented.
5. Domestic financial activity: the US is the dominant market for domestic activity with a score of 93 out of a 100. It is the largest market in 17 out of 21 metrics, and its score is double that of China (47), which in turn is nearly double Japan’s score of 25. The score for the US is more than six times higher than that of the UK.
6. International financial activity: the US is also the biggest market for international financial activity (although it is less dominant than for domestic activity) with a score of 76 out of 100. The UK ranks a strong second with an overall score of 56 – more than double the score of its nearest rivals Luxembourg (22) and Hong Kong (21). The UK’s score in international activity (56 out of 100) is four times higher than its score in domestic business (14).
7. The evolution over time: since 2016 domestic activity has grown on average by 16% and international activity at a slightly faster rate of 21%. Our index shows several clear growth trends: the UK has lost market share in both domestic and international activity (domestic activity effectively stagnated in the three years after 2016); the EU has lost market share across the board; and markets in the Asia Pacific have gained market share, particularly Hong Kong and Singapore in international activity.
8. The share of international activity: we analysed how international financial centres are based on those metrics where we were able to compare international activity as a percentage of total activity. Luxembourg and Singapore are the most international financial centres, with international business accounting for roughly 60% of all financial activity, closely followed by Hong Kong and the UK. In contrast, some big financial centres are much less international: just 14% of activity in the US is international, and just 3% in China.
9. The bigger picture: when it comes to wider environment metrics such as the economic and business environment, quality of life, infrastructure and human capital, the US ranks again first and it is closely followed by the UK in the second place and smaller financial centres such as Switzerland, Luxembourg, Singapore and Hong Kong. The rest of the top 10 is occupied by the Netherlands, Denmark, and Ireland.
10. A broader look: while we have not included qualitative metrics in our main index as it results in a much narrower distribution of scores that flatters smaller financial centres, the combination of all financial activity and wider environment metrics confirms our main thesis. The US is by far the top financial centre with the UK strong second, followed by China, Japan, and Hong Kong.
We collected data from 2014 to 2019 for 65 countries around the world that represent around 94% of global GDP and roughly 95% of global financial activity. Our main dataset includes: 42 metrics of financial activity (21 domestic and 21 international), 18 metrics of the wider economic, political, business, regulatory and social environment and 13 metrics measuring the share of intrenational activity. For each metric and country we used a three year average to 2016 and 2019 to iron out annual volatility in financial markets and assigned a score of a 100 to the country with the highest value in each metric adjusting others accordingly.
Our index highlights the dominance of the US and the UK as the top two financial centres in the world in terms of sheer scale of financial activity, and underlines the extent of their lead over other countries. Our approach will enable us to track more effectively the relative shifts in activity over time between different financial centres resulting from Brexit and other geopolitical and economic trends. It is a work in progress aiming to complement existing studies rather than replace them.
I would like to thank Eivind Friis Hamre and Michelle Hoh for their valuable contribution to the data collection, William Wright for his support and feedback, Dealogic and Preqin for providing access to most of the data, and our members for supporting our work on bigger and better capital markets.